RealtyTrac: HELOC Risk Worse Than Anticipated

More than half of the 3.3 million home equity lines of credit (HELOCs) scheduled to reset with higher rates in the next four years are on properties that are “seriously underwater,” RealtyTrac data show.

A total of 3,262,036 HELOCs with an estimated total balance of $158 billion that originated during the housing price bubble between 2005 and 2008 are still open and scheduled to reset between 2015 and 2018.

Of these, 1,834,588 (56%) are on residential properties that are substantially underwater, meaning the combined loan-to-value ratio of all outstanding loans secured by the property is 125% or higher, RealtyTrac notes.

Homes purchased or refinanced near the peak of the housing bubble between 2005 and 2008 are more likely to still be underwater despite the strong recovery in home prices over the last three years, says Daren Blomquist, vice president at RealtyTrac, in a statement.

“Many homeowners with HELOCs who have positive equity likely already refinanced to mitigate the payment shock from a resetting HELOC — an option not readily available for homeowners still underwater,” he says.

The good news is that in 2014 there were more than 700,000 resetting HELOCs without a corresponding wave of defaults, but the bad news is that a much lower 40% of those 2014 HELOC resets were on underwater homes, data show.

“We are entering a period of higher risk over the next four years when it comes to resetting bubble-era HELOCs — especially given slowing home price appreciation that offers underwater homeowners less hope of recovering their equity in the short term,” Blomquist says.

States with the most HELOC resets on homes that are underwater are Nevada, Arizona, Florida and Illinois. In fact, 84% of Nevada homes that are underwater have HELOC resets over the next four years, data show.

California led the way among all states in terms of sheer volume of resetting HELOCs with 645,872 HELOCs scheduled to reset over the next four years. Of those, 66% are on homes still underwater.

“Many of these auto resets are moving from interest-only to principle and interest payments and drastically increasing homeowner monthly liabilities, to the extent that they need to sell to get out from under the new payment,” Mark Hughes, CEO at First Team Real Estate, covering the Southern California market, tells RealtyTrac.

“Many will be stuck where many of their neighbors found themselves seven years ago — with not many options,” Hughes says. “There will be fallout and distress on a smaller scale as the bursting bubble clean-up continues. Many homeowners who got through the downturn relying on the values don’t support an easy exit.”

Read the RealtyTrac article here.

Written by Cassandra Dowell

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